Market Conditions
Market Conditions Q4 2014
Market Conditions Q1 2014
|
|
It feels like the worst might be over and Q1 2014 brings a breath of fresh air to the healthcare services M&A market. Although Congress threatened yet another crisis, disaster was averted as the debt ceiling was raised with relatively little controversy and it seems like we’re getting back to business as usual. Kaiser Health News reported that CMS will be directing its focus to post-acute care and the Obama budget restated a commitment to shift away from the fee-for-service payment model to more value-based approaches. Medicare Certified Home Health MedPac restated many of its margin shrinking proposals in its recommendations to Congress, but rebasing of rates to below the cost of care is still the greatest threat to most providers. We find it sadly ironic that MedPac’s response to what it considers “exceptionally high” margins is likely to put any provider without exceptionally high margins out of business. We prefer the DOJ’s approach of focusing on providers with suspiciously high margins (or other suspicious metrics) and shutting down the fraudsters rather than burying every provider in so much bureaucracy that only the most profitable can survive. Hospice As hospice takes its rightful place in the continuum of care, the industry is getting a lot more attention. On one hand, MedPac suggests that not enough patients are admitted to hospice early enough to benefit from care: On the other hand, the Washington Post reports a 50% increase in live discharges and a drastic increase in the length of stay since 2002 as for profit providers have come to dominate the market. While the Washington Post article was probably a little unfair in its portrayal, it is a useful cautionary tale against hospice providers being complacent about program integrity and the reputation of the industry. Medicaid Medicaid expansion is the issue on everybody’s mind as more states continue to expand Medicaid under the ACA and more states experiment with premium supports as an alternative. The National Governors Association recommended making most waiver programs permanent and exploring dual eligible solutions that don’t shift costs from Medicare to Medicaid. Increased program integrity enforcement will probably increase costs for everybody, but there could be particular scrutiny of the consumer-directed model of care which might be good news for some traditional providers. The projected growth and increased strategic importance of Medicaid is attracting new buyers that could stimulate more activity and higher valuations. Private Duty Although demand for care is increasing rapidly, the Employer Mandate and the elimination of the Companionship Exemption are considerable threats to providers who are not large enough to absorb the costs. Even those who can survive will have to adjust their operating practices and consolidate to be successful. Growth is there to be had, but many providers will have to manage on smaller margins unless they can pass on their cost increases to consumers. Buyers are looking for volume to compensate for reduced margins, but sellers with good numbers are hard to find. Conclusions It’s been over 5 years since the shock of the financial crisis and recession and almost 4 years since the Affordable Care Act passed. We might be experiencing a “new normal,” but a sense of normalcy seems to be setting in after years of crisis management. Payers and providers are experimenting with new service delivery models and consolidation should continue apace. If you’d like to discuss how all of this affects you, feel free to contact us any time. |
|
Market Conditions Q2 2014
|
|
Conditions continue to improve as increasing growth trumps decreasing margins in the healthcare services M&A marketplace. The US Census Bureau reminds us of the foundation for significant growth by projecting the 65+ population to double within the next 20 years and the Bureau of Labor Statistics indicates that healthcare employment in general and homecare employment in particular are leading the recovery in the labor market. However, the imperative for efficiency continues to drive the transition away from fee-for-service to outcome-based and risk-sharing service delivery models, which is creating new winners and losers in the market. Medicare Certified Home Health Medicare certified home health providers continue to face margin erosion as costs of compliance increase and payment rates decrease. NAHC has been instrumental in introducing a Rebasing Relief Bill into Congress, but shrinking margins are only part of the story. Patient coordination and payment bundling are incentivizing facility-based referral sources to provide home health themselves or to work with a smaller number of partners in the provision of care, meaning that all providers have to be more strategic. Hospice Although MedPac has repeated some of its more onerous recommendations to Congress, hospice providers continue to enjoy some of the best regulatory and rate conditions in the healthcare services industry. Program integrity enforcement will surely increase, but MedPac views increased hospice utilization as decreased utilization of all other (more expensive) forms of care, so we expect hospice to continue its growth unabated. Medicaid Although the divide continues to grow between states that are expanding Medicaid and those that are implementing premium supports, Medicaid homecare providers are becoming integral to patient coordination strategies to manage chronic care and reduce acute care costs – especially for the dual eligible population. With the economy slowly improving, some states are beginning to increase rates as they rely more on Medicaid homecare providers to prevent more expensive care that may be avoidable. We’re seeing more interest in the Medicaid providers, especially those that have achieved scale. Private Duty Private duty providers are enjoying somewhat of a rebound from the economic crisis and recession, but the employer mandate and the elimination of the companionship exemption will have some providers adjusting their business models as the implementation deadlines approach. The Home Care Association of America, National Association for Home Care and the International Franchise Association have filed a lawsuit challenging the elimination of the companionship exemption, which might bring some relief. We’re hearing from buyers of private duty agencies who want to scale up in response to reduced projected margins, but we’re not seeing enough viable sellers who have already absorbed the costs of compliance. Conclusions M&A market activity is increasing as the economy improves and the regulatory environment stabilizes. However, since strategy is driving the market more than accretive growth, the market is somewhat uneven. Irving Levin Associates reported a 100% increase in home health transactions in Q4 2013 and a 40% decrease in home health transactions in Q1 of 2014 which is more reflective of a very small sample size rather than any market trend. What we’re seeing is rapid consolidation in response to reduced margins and regulatory incentives, resulting in further separation between the top and bottom of the market. If you’d like to discuss how all of this affects you, feel free to contact us any time. |
|
Market Conditions Q4 2013
|
|
2013 was a transitional year in the homecare industry. A shift towards value and risk based compensation models is accelerating and more providers of all types are collaborating on patient coordination and payment bundling. Traditional homecare providers are contending with increased costs of compliance and reduced revenue while facility based providers are looking to homecare to buttress their margins and to capitalize on projected growth of all types of in-home services. The general public is starting to understand the importance of in-home services as an article in The Atlantic Monthly suggested that more home-based care could mean “a more humane, effective, and affordable healthcare system is closer than we think.” Dysfunction in Washington continues to be the primary barrier to growth as Q4 began with a government shutdown and debt ceiling default crisis. However, perhaps the budget deal in Congress portends more bipartisanship and a more stable operating environment for 2014. We’re optimistic as we’ve definitely noticed an uptick in both qualified sellers and buyers now that implementation of the Affordable Care Act is upon us. Medicare Certified Home Health As Medicare certified home health agencies become more central to the continuum of care, providers are facing significantly increasing costs and decreasing revenues. It was nice that the budget deal in Congress didn’t add additional rate cuts or introduce co-pays, but the Medicare Final Rule did impose the maximum allowable rate cut under the Affordable Care Act: 3.5%/year for four years – a 14% cut by 2017. CMS projects that “approximately 43% of all Medicare home health providers will be paid less than the cost of care by 2017” and NAHC puts the estimate at closer to 70%. It’s possible that providers could see additional headaches such as co-pays, deductibles and episode caps, but the single biggest threat to providers right now is rebasing rate cuts. The good news is that Mitch McConnell, John Boehner and Harry Reid have all expressed support for home health and opposition to rebasing, so some relief might be in the offing. Patient coordination is attracting buyers from across the continuum of care, but increased regulatory costs and rate cuts are reducing margins. IBIS World Industry analyst Jocelyn Phillips notes that “to increase their margins, operators have increased consolidation activity” and we’ve seen the same as more facility-based providers are increasing their emphasis on home health. Buyers have shown that they’re willing to pay a premium for market leading sellers, but that could change if rebasing permanently reduces margins below the cost of providing care. Hospice Hospice providers absorbed more growth in 2013 as palliative care has been promoted as a cost saving component of the Affordable Care Act and new agencies can’t be established fast enough to keep up with demand. Program integrity is becoming a larger issue as media outlets such as The Washington Post have reported that fraud is ubiquitous and the OIG has begun to focus on GIP, length of stay, and other potentially problematic areas. Although hospice providers are also experiencing increasing costs of compliance (particularly with new cost reporting requirements), operating margins remain comparatively good. We’re seeing a diverse range of buyers from hospitals and nursing homes to home health and other providers adding hospice to their continuum of care. …and the relative scarcity of hospice sellers has meant that valuations remain high. Medicaid 2013 may be the year that the tide turned for Medicaid providers. A somewhat recovered economy is improving the rate environment in many states and the Affordable Care Act should stimulate significant growth. Roughly half of states have agreed to expand Medicaid and many of those that haven’t are experimenting with various forms of private insurance premium supports. Many states are also addressing the dual-eligible issue by rebalancing resources away from facility-based care in favor of more home-based care. As risk based models become reality, multi-modality providers are leveraging chronic and non-medical care to prevent chronic episodes and deliver the most positive patient outcome for the lowest cost to the payer. Along with operational synergies, buyers are also attracted to the relative affordability and scalability of Medicaid acquisitions. Private Duty Although demand for care is increasing rapidly, the Employer Mandate and the elimination of the Companionship Exemption are considerable threats to providers who are not large enough to absorb the costs. Even those who can survive will have to adjust their operating practices and consolidate to be successful. Growth is there to be had, but many providers will have to manage on smaller margins unless they can pass on their cost increases to consumers. Buyers are looking for volume to compensate for reduced margins, but sellers with good numbers are hard to find. Conclusions The transition to value and risk based payment models has elevated strategic variables above simple growth in M&A considerations. Moody’s senior vice president Dean Diaz said that “we expect acquisitions, joint ventures and other strategic alignments to continue as for-profit hospitals seek to offset anticipated declines in reimbursement under the Affordable Care Act.” We see hospitals and other providers integrating homecare of all types into their delivery models in order to maximize financial, operational and clinical efficiency. Thus, the market for in-home providers remains robust. If you’d like to discuss how all of this affects you, feel free to contact us any time. |
|